U.K. industrial production increased at a faster-than-expected pace in December, in line with more recent economic data that suggest the economy might avoid slipping back into a renewed recession. However, the sector recorded a marked contraction in output in the fourth quarter amid wide-spread closure of oil fields in the North Sea, latest data showed Thursday.

"December's industrial production and trade figures added to evidence that the economic picture improved at the tail end of last year," Capital Economics UK Economist Samuel Tombs said.

"But, the fact that the trade deficit for the year as a whole reached a record high underlines that these improvements are coming from exceptionally weak starting points."

Meanwhile, production declined a seasonally adjusted 1.9 percent quarter-over-quarter in the fourth quarter, marking the biggest fall since the first quarter of 2009.

Production by the manufacturing sector advanced 1.6 percent compared to November, when it dropped by 0.3 percent. Economists had expected a more modest growth of 0.8 percent. Output of the mining and quarrying sector rose by 1.2 percent.

"With the manufacturing surveys suggesting that order books are weakening again, largely as result of fading overseas demand, the industrial sector is not out of the woods yet," Tombs added.

Compared to December 2011, overall industrial production decreased 1.7 percent in December after falling 2.4 percent in the preceding month. Manufacturing output dropped at a slower rate of 1.5 percent than 2 percent a month ago.

Economists had forecast a 2 percent annual fall in overall output, and a 2.4 percent drop in manufacturing production.

In a separate report, the statistical office said that the shortfall in U.K.'s merchandise trade fell to GBP 8.9 billion in December from GBP 9.3 billion a month ago.

The results of the latest purchasing managers' survey released by Markit Economics last week showed that the British manufacturing sector expanded further in January, with production increasing to a sixteen-month high. The corresponding survey for the service sector showed that the sector returned to growth in the beginning of the year as business expectations rose to the highest level in eight months.

The British economy contracted 0.3 percent in the fourth quarter after a modest recovery in the previous three months proved to be short-lived. The economy has been under pressure from the government's austerity program and above-target inflation that outpaced wage-growth.

The Bank of England , or BoE, is widely expected to hold fire at today's monetary policy meeting, after keeping the main interest rate steady at 0.5 percent at the December meeting. The central bank is also seen leaving its quantitative easing unchanged at GBP 375 billion.

Although the BoE is expected to retain the current stimulus, economists say the bank will reinvest the redeemed gilts again in the asset purchase program.

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